The Fed and Interest Rates: Biased Toward the GOP?

ANN ARBOR — With the elections less than a week away, it’s worth considering that the party of the president influences the policy behavior of the Federal Reserve Bank, according to a new University of Michigan study.

The Federal Reserve Bank increases interest rates before the presidential elections when Democrats are in office, but lowers the rates when Republicans control the White House. The independent bank finds it easier to accomplish its policy goals when Republicans control the White House than when Democrats do, the researchers say.

“The behavior we have observed is consistent with the possibility that the Fed seeks to aid the election and re-election of Republican presidents,” said U-M political scientist William Clark, lead author of the study appearing in an upcoming issue of Economics & Politics.

Clark and U-M doctoral student Vincent Arel-Bundock examined the Federal Funds Rates from 1951 to 2008—a period in which a Republican has occupied the White House nearly two-thirds of the time.

Every Republican president to run for re-election since the Fed became operationally independent in 1951—with the exception of George H.W. Bush—was re-elected. In contrast, Bill Clinton was the only Democratic president to serve two full terms after the Fed became independent.

Clark notes that the Fed’s partisan bias with its policies could be attributed to independent central banks run by conservative bankers who are “more eager to thwart the electorally motivated expansions by left-wing governments before elections.”

“We observe the counter-intuitive partisan difference that right wing governments preside over more lax fiscal and monetary policies than left-wing governments,” the authors wrote.

– By Jared Wadley

*Source: University of Michigan

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